Real estate investing is exciting and profitable but can also be challenging and scary. How do you know which properties will return your investment? How do you know if you’re spending too much time working on deals, or if you should cut back? We all know what happens when you overspend on a home renovation project; the costs spiral out of control. That’s why real estate investing budgets are so important. Learn what budgeting errors can turn a flip upside down and how to avoid them.
Money Tracking Helps Avoid Pitfalls
Before you start investing, be prepared to track both your monthly holding costs and your renovation costs with a spreadsheet. Start with the Renovation budget as a guide and then add columns for the additional monthly costs that are outside of the renovation (insurance, utilities, etc.) By tracking these data points right away, you will immediately begin to protect your budget and your investments.
Know Your Margins
We see so many excited real estate investors jump on properties with profit margins so tight that the investment could become a series of disasters. Build a spreadsheet to help you determine what your bottom line profit goal should be for every property before diving into a new project. A great sales price is not the only factor you should consider when making your purchase. That means no sight-unseen purchases! Here are some of the factors that can impact your bottom line to help you more thoroughly plan every cost before you invest,
- Overpaying for a home that doesn’t have value
- Not executing a thorough walk-through with your project manager
- Underestimating your construction expenses
- Forgetting to calculate your carrying costs into your budget
Understanding your margins also means you keep an eye on the final price point of your flip. If your house is the most expensive in the neighborhood or you’ve spent way too much money and you’re not getting the returned value, that can be a big financial loss. Your profitability is directly impacted by comparable home sales near your location. This kind of due diligence safeguards your profitability and business growth.
Estimate Operating Costs
There are operating costs associated with any real estate investment that you can’t avoid. These costs include property taxes, home insurance, renovation costs, permitting fees, HOA dues, utilities, and loan interest. You need to have a budget for these costs so that you don’t run out of money especially if there’s a major crisis with the property. Additionally, you need to be aware of what kind of insurance your home requires. Are you in a flood zone? What other kinds of natural disasters do you need to protect your investment from? When it comes to your renovation costs, have you factored in plumbing, electrical, architectural drawings, structural repairs and maintenance, landscaping, and not only permits but the time your city or town takes to issue approval?
So, not only are you tracking expenses and tracking your cash flow, but you’re also budgeting for taxes and insurance. That’s a lot to track! Pro-tip, consider utilizing a real estate investing software program. Be sure to look for a program that can help you manage your cash flow and track expenses including taxes and insurance.
Teamwork Makes the Dream Work
Who you work with will dramatically affect how well you do in your real estate investing business!
Working with a traditional bank might make you feel more secure in your transaction. But, in many cases, you will have a unique project that’s well outside of their traditional lending scope and you’ll be stuck without funding. Solution? Find a team of hard money lenders who have personal experience flipping homes, have millions of dollars in private funding to offer you, and can tailor the loan to each of your unique situations.
You think you’ll save money by taking on several of the construction elements of your fix and flip projects. In many cases, it is just the opposite. The best way you can spend your time is to focus on your cash flow, expenses, and business growth. Hiring reliable trustworthy construction professionals is key to real estate investing success. We have an entire article dedicated to giving you advice on finding the best general contractor here.
Have your team in place before you begin your next project!
- General contractor
- Title agent
- Real estate attorney
- Hard money lender
- Architect and/or engineer
Let’s Get Your Projects Funded the Right Way
To succeed as a real estate investor, you need to track every part of your projects to help prevent you from any major losses. Working with a hard money lender who has an in-house construction expert and combined experience of more than 50 years in the industry with 40+ successful fix and flip projects of their own is the best place to start. From fast and transparent lending to construction advice and budget reviews, our team is here to direct and guide you through successful renovations. We bring the power of multi-million dollar financing with the local, small-town respect and honesty you deserve. Call us at 856-422-3232 or send us a message – let’s get you funded today!